Dissertation Preethi 20100226123251

Generated by Foxit PDF Creator Foxit Software
http://www.foxitsoftware.com For evaluation only.

An Analytical Study of Nature and Types of Vertical Anti-Competitive Agreements
AN ANALYTICAL STUDY OF
NATURE AND TYPES OF VERTICAL
ANTI-COMPETITIVE AGREEMENTS1
Preethi Sundararajan, VII Semester, BBA LLB, National Law University, Jodhpur.

______________________________________________________________________________
ACKNOWLEDGEMENT
I would like to express my sincere and heartfelt thanks firstly to Mr.Anil Kumar for his support,
guidance and encouragement. I would also like to thank Mr.Parashar and Ms.Geeta Gouri,
Members of the Competition Commission who welcomed me into their organization and gave
me direction in fulfilling this dissertation. I would then like to thank Mr.P.K.Singh whose doors
were also open for me and also the Library Staff. Lastly, I would like to thank Ms.Monica for
obliging me and to whose great inconvenience I was able to complete this dissertation.

____________________________________________________________________________
LIST OF ABBREVIATIONS
&
and
AIR
All India Reporter
Am. J. Comp. L.
American Journal of Competition Law
Cal. L. Rev.
California Law Review
Colum. L. Rev.
Columbia Law Review
Comp.Cas.
Company cases
EC
European Commission
Edn.
Edition
EU
European Union
Harv. L. Rev.
Harvard Law Review
Hous. J. Int'l L.
Houston Journal of International Law
J. Competition L. & Econ.
Journal of Competition Law and Economics
MRTP
Monopoly Restrictive Trade Practices
RPM
Resale Price Maintenance
s.
Section
SC
Supreme Court
Suffolk U. L. Rev.
Suffolk University Law Review
U. Miami L. Rev.
University of Miami Law Review
U. Toronto L.J.
University of Toronto Law Journal
US
United States of America

____________________________________________________________________________
INDEX
Title of the Chapter
UNDERSTANDING
AGREEMENTS
Page Number
ANTI-COMPETITIVE
DIFFERENCES BETWEEN VERTICAL AND HORIZONTAL ANTICOMPETITIVE AGREEMENTS
20
TIE-IN ARRANGEMENTS
22
EXCLUSIVE SUPPLY AND DISTRIBUTION AGREEMENTS
28
REFUSAL TO DEAL
31
RESALE PRICE MAINTENANCE
34
OTHER
TYPES
AGREEMENTS
BIBLIOGRAPHY
OF
OF
VERTICAL
VERTICAL
ANTI-COMPETITIVE
38
40

_____________________________________________________________________________
Chapter One: UNDERSTANDING OF VERTICAL ANTI-COMPETITIVE AGREEMENTS
Agreements which generally cause an adverse effect or distort or restrict competition are called
anti-competitive agreements. Vertical restraints are agreements or concerted practices entered
into between two or more companies each of which operates, for the purposes of the agreement,
at a different level of the production or distribution chain, and relating to the conditions under
which the parties may purchase, sell or resell certain goods or services.2 Vertical agreements at
different levels of the production or supply chains often have strong efficiency rationales and
enhance competition. However, they may also have anti-competitive effects, unfairly eliminating
rivals or making them less effective competitors, or reducing competition between buyers or
sellers. Since, there is a great chance that vertical anti-competitive agreements may not be anticompetitive, regulators require a systematic economic assessment of whether pro-competitive or
anti-competitive effects of a vertical agreement will dominate when these agreements involve
enterprises with a significant market share.
INDIAN POSITION
Section 3 of the Competition Act, 2002 defines anti-competitive agreements as any agreements
in respect to production/supply/distribution/storage/acquisition/control of goods or provision of
services that causes an appreciable adverse effect on competition in India. Adverse effect on
competition refers not to a particular list of agreements, but to a particular economic
consequence, which may be produced by quite different sorts of agreements in varying time and
circumstances. It generally refers to any action which operates to the prejudice of the public
interests by unduly restricting competition or unduly obstructing due course of trade. Whether or
not an action has an appreciable adverse effect on competition or not depends on various factors
such as
European Commissions Guidelines on Vertical Restraints (2000/C 291/01)

Market share in the relevant market3
Strength of remaining competition
Whether the action springs from business requirements or purpose to monopolise
Probable development of the industry, consumer demands, and other characteristics of

the market.
Thus, any act which essentially obstructs the free flow of commerce between the states, or
restricts, in that regard, the liberty of a trader to engage in business, including restraints of trade
aimed at compelling third parties and strangers involuntarily not to engage in any other trade.4
Under this Act, whether an agreement is anti-competitive by reason of having an adverse effect
on competition or not is decided either by the presumptive rule approach or the rule of reason
approach. Section 3 goes on to define what agreements may be presumed to have an appreciable
adverse effect on competition. The parties to the agreement must be either enterprises or persons
or an association of the afore-mentioned who are engaged in identical or similar trade of goods
or provision of services. S. 3(3) provides for four types of agreements which are as follows:1) Which directly or indirectly determines purchase or sale prices Price fixing either
directly or indirectly is prohibited.
Agreements that are entered into with the sole
purpose of defeating competition through fixing prices are prohibited as it is not in the
best interests of the consumer. The prohibition under this head relates to price fixing and
pricing methods. Thus, any agreement entered into for the purpose and with the effect of
raising, depressing, fixing, pegging or stabilizing the price of a commodity is per se
illegal and this also includes agreements relating to specific forms of price computation
and also price discrimination.
2) Limits or controls production, supply, markets, technical development, investment or
provision of services Any agreement that stipulates the amount of production or
restricts the market where the goods or services are to be offered is prohibited.
3) Shares the market or source of production or provision of services by way of allocation
of geographical area of market, or type of goods or services, or number of customers in
the market or any other similar way If the retailers/distributors mutually enter into an
agreement dividing the market by geographical areas amongst themselves and supplying
3
4
DGIR v. UB-MEC Batteries [1996] 87 Comp.Cas 891 (MRTPC)

Lowewe v. Lowlor 208 US 274

only to those customers, or if they mutually agree to offer only particular goods or
services to the deterrence of the consumers, such an agreement is prohibited. The
agreement must no result in a territorial division or division of the product market
amongst enterprises. Similarly, market sharing and allocation detrimental to the
consumers is also prohibited.
4) Directly or indirectly results in bid rigging or collusive bidding The explanation to
s.3(3) defines bid rigging as any agreement that has the effect of eliminating or reducing
competition for bids or adversely affecting or manipulating the process for bidding.
Collusive bidding though not defined means an attempt by conspiring bidders to
circumvent rules and laws laid down to ensure free and competitive bidding. It has to be
kept in mind that the Competition Act, 2002 defines agreement as being inclusive of
informal oral understanding also. Rigging has an adverse effect on competition and
collusion is a secret agreement for illegal purposes or a conspiracy5. Hence, any
agreement or understanding that leads to bid rigging or collusive bidding is also
prohibited.
US POSITION
In USA, the following statutes prohibit anti-competitive agreements:1. Sherman Act Section 1 prohibits agreements that constitute restraints of trade if they are
on balance anti-competitive. The agreement can also be challenged under section 2 if the
party allegedly indulging in anti-competitive practice has monopoly power and if the
agreement anticompetitively helps obtain or maintain such monopoly power.
2. Federal Trade Commission Act Section 5 of the Federal Trade Commission Act prohibits
entities from engaging in unfair or deceptive acts or practices in interstate commerce. The
Federal Trade Commission can challenge a vertical anticompetitive agreement under this
provision.
Subhash Chandra v. Ganga Prasad AIR 1967 SC 878

3. Clayton Act Under Section 3 of this Act it is unlawful for any person to lease or make a
sale of goods is made so as to substantially lessen competition or tend to create a monopoly
in any line of commerce. The Act basically stipulates two requirements:a) Sales or discounts of goods that are conditional on the purchaser not dealing with
rivals and
b) Proof that their effect may be to substantially lessen competition. 6
4. Robinson-Patman Act This is a US Federal Law that prohibits what were considered, at the
time of passage, to be anticompetitive practices by producers, specifically price
discrimination. It grew out of practices in which chain stores were allowed to purchase
goods at lower prices than other retailers. The Act provided for criminal penalties, but
contained a specific exemption for co-operatives. In general, the Act prohibits sales that
discriminate in price on the sale of goods to equally-situated distributors when the effect of
such sales is to reduce competition. The seller may not throw in additional goods or services.
Injured parties or the US government may bring an action under the Act.
EUROPEAN POSITION
The European Commission (EC) Treaty prohibits undertakings, decisions or concerted practices
that affect trade between member states and prevent, restrict or distort competition. Like the
Competition Act, 2002 Article 81 of the EC Treaty also identifies certain acts which it deems as
restrictive of competition which are as follows:a. directly or indirectly fix purchase or selling prices or any other trading conditions;
b. limit or control production, markets, technical development, or investment;
c. share markets or sources of supply;
d. apply dissimilar conditions to equivalent transactions with other trading parties, thereby
placing them at a competitive disadvantage;
e. make the conclusion of contracts subject to acceptance by the other parties of
supplementary obligations which, by their nature or according to commercial usage,
have no connection with the subject of such contracts.
Einer Elhauge & Damien Geradin, Global Competition Law and Economics, Hart Publishing, USA, First Edn.
Reprint, 2008, Pg. 451-452

This definition though similar to the Indian definition at many levels in the sense that it also
includes price fixing, market sharing, market allocation, also expressly includes a few more
activities as anti-competitive. The definition delves on discrimination of any manner which may
have anticompetitive consequences whereas the Indian definition just talks about price
discrimination.7
The provision also goes on to enlist the exemptions. Article 81(3) exempts all agreements which
contribute to improving the production or distribution of goods or to promoting technical or
economic progress, while allowing consumers a fair share of the resulting benefit. Exemptions to
Article 81 behavior fall into three categories:
First, Article 81(3) creates an exemption where the practice is beneficial to consumers,
e.g., by facilitating technological advances (efficiencies), but does not restrict all
competition in the area. In practice very few official exemptions were given by the
Commission and a new system for dealing with them is currently under review.
Secondly, the Commission has agreed to exempt 'Agreements of minor importance'

(except those fixing sale prices) from Article 81. This exemption applies to small
companies, together holding no more than 10% of the relevant market in the case of
horizontal agreements and 15% each in the case of vertical agreements (the de minimis
condition). In this situation as with Article 82, market definition is a crucial, but often
highly difficult, matter to resolve.
Thirdly, the Commission has also introduced a collection of block exemptions for
different types of contract and in particular in the case of vertical agreements. These
include a list of permitted contract terms, and a list of those banned in these exemptions
(the hardcore restrictions).8
An argument was also put forward before the European forum that vertical agreements could not
be anti-competitive as they did not restrict competition because enterprises at different stages of
production could not be competitors. It was held in the Consten-Grundig case that the possible
application of article 81 to a sole distributorship contract cannot be excluded merely because the
7
8
Richard Buxbaum, Antitrust Regulation Within The European Economic Community, 61 Colum. L. Rev. 402
http://en.wikipedia.org/wiki/Article_81_of_the_Treaty_Establishing_the_European_Community

grantor and the concessionnaire are not competitors inter se and not on a footing of equality.
Competition may be distorted not only by agreements which limit it as between the parties, but
also by agreements which prevent or restrict the competition which might take place between
one of them and third parties. For this purpose, it is irrelevant whether the parties to the
agreement are or are not on a footing of equality as regards their position and function in the
economy. This applies all the more, since, by such an agreement, the parties might seek, by
preventing or limiting the competition of third parties in respect of the products, to create or
guarantee for their benefit an unjustified advantage at the expense of the consumer or user,
contrary to the general aims of the provision. It is thus possible that, without involving an abuse
of a dominant position, an agreement between economic operators at different levels may affect
trade between member states and at the same time have as its object or effect the prevention,
restriction or distortion of competition. What is particularly important is whether the agreement
is capable of constituting a threat either direct or indirect, actual or potential, to freedom of trade
between member states in a manner which might harm the attainment of the objectives of a
single market between states. Thus the fact that an agreement encourages an increase, even a
large one, in the volume of trade between states is not sufficient to exclude the possibility that
the agreement may ' affect ' such trade in the abovementioned manner. In the above-mentioned
case, the contract between Grundig and Consten, on the one hand by preventing undertakings
other than Consten from importing Grundig products into France, and on the other hand by
prohibiting Consten from re-exporting those products to other countries of the common market,
indisputably affects trade between member states. These limitations on the freedom of trade, as
well as those which might ensue for third parties from the registration in France by Consten of
the gint trade mark, which Grundig places on all its products, were found to be enough to satisfy
the requirement in question. 9
Other than the EC Treaty there are other documents which govern European Competition Law.
For, example there is the document titled Guidelines on Vertical Restraints which elucidates the
position of law with specific reference to vertical restraints. The document enlists four negative
impacts of vertical anti-competitive agreements that have to be prevented as the below:-
tablissements Consten S..R.L. and Grundig-Verkaufs-GmbH v. Commission of the European Economic

Community
10

Foreclosure of other suppliers or buyers by raising barriers to entry
Reduction of inter-brand competition, including the facilitation of both explicit and tacit
collusion
Reduction of intra brand competition between distributers of the same brand
The creation of obstacles to market integration.10
Similarly the Guidelines also identify certain positive effects such as

The following reasons may justify the application of certain vertical restraints:
To "solve a 'free-rider' problem". One distributor may free-ride on the promotion efforts
of another distributor. This type of problem is most common at the wholesale and retail
level. Exclusive distribution or similar restrictions may be helpful in avoiding such freeriding. Free-riding can also occur between suppliers, for instance where one invests in
promotion at the buyer's premises, in general at the retail level, that may also attract
customers for its competitors. Non-compete type restraints can help to overcome this
situation of free-riding.
To "open up or enter new markets". Where a manufacturer wants to enter a new

geographic market, for instance by exporting to another country for the first time, this
may involve special "first time investments" by the distributor to establish the brand in
the market. In order to persuade a local distributor to make these investments it may be
necessary to provide territorial protection to the distributor so that he can recoup these
investments by temporarily charging a higher price. Distributors based in other markets
should then be restrained for a limited period from selling in the new market. This is a
special case of the free-rider problem described above.
The "certification free-rider issue". In some sectors, certain retailers have a reputation
for stocking only "quality" products. In such a case, selling through these retailers may
be vital for the introduction of a new product. If the manufacturer cannot initially limit
his sales to the premium stores, he runs the risk of being de-listed and the product
introduction may fail. This means that there may be a reason for allowing for a limited
duration a restriction such as exclusive distribution or selective distribution. It must be
10
Para 107 of the European Commissions Guidelines on Vertical Restraints (2000/C 291/01)
11

enough to guarantee introduction of the new product but not so long as to hinder largescale dissemination. Such benefits are more likely with "experience" goods or complex
goods that represent a relatively large purchase for the final consumer.
The so-called "hold-up problem". Sometimes there are client-specific investments to be

made by either the supplier or the buyer, such as in special equipment or training. For
instance, a component manufacturer that has to build new machines and tools in order to
satisfy a particular requirement of one of his customers. The investor may not commit
the necessary investments before particular supply arrangements are fixed.
The "specific hold-up problem that may arise in the case of transfer of substantial knowhow". The know-how, once provided, cannot be taken back and the provider of the
know-how may not want it to be used for or by his competitors. In as far as the knowhow was not readily available to the buyer, is substantial and indispensable for the
operation of the agreement, such a transfer may justify a non-compete type of
restriction. This would normally fall outside Article 81(1).
"Economies of scale in distribution". In order to have scale economies exploited and

thereby see a lower retail price for his product, the manufacturer may want to
concentrate the resale of his products on a limited number of distributors. For this he
could use exclusive distribution, quantity forcing in the form of a minimum purchasing
requirement, selective distribution containing such a requirement or exclusive
purchasing.
"Capital market imperfections". The usual providers of capital (banks, equity markets)
may provide capital sub-optimally when they have imperfect information on the quality
of the borrower or there is an inadequate basis to secure the loan. The buyer or supplier
may have better information and be able, through an exclusive relationship, to obtain
extra security for his investment. Where the supplier provides the loan to the buyer this
may lead to non-compete or quantity forcing on the buyer. Where the buyer provides
the loan to the supplier this may be the reason for having exclusive supply or quantity
forcing on the supplier.
"Uniformity and quality standardisation". A vertical restraint may help to increase sales
by creating a brand image and thereby increasing the attractiveness of a product to the
final consumer by imposing a certain measure of uniformity and quality standardisation
12

on the distributors. This can for instance be found in selective distribution and
franchising.
There is a large measure of substitutability between the different vertical restraints. This means
that the same inefficiency problem can be solved by different vertical restraints. For instance,
economies of scale in distribution may possibly be achieved by using exclusive distribution,
selective distribution, quantity forcing or exclusive purchasing. This is important as the
negative effects on competition may differ between the various vertical restraints11
REQUIREMENTS OF A VERTICAL ANTICOMPETITIVE AGREEMENT

In order for any anticompetitive action to qualify as a vertical anticompetitive agreement, it is
necessary that the anticompetitive action was result of an agreement that is a concerted action
that involves two or more people and not unilateral conduct. The Competition Act, 2002 defines
agreement as any arrangement, understanding or action in concert. The definition goes on to
specify that it is of no consequence whether the agreement if formal, in writing or intended to be
enforceable through legal proceedings but, as specified earlier, it has to be in concert. The
inclusion of this requirement excludes unilateral conduct on the part of say a distributor or
supplier from qualifying as anticompetitive.
In USA, section 1 of the Sherman Act requires that there be a contract, combination... or
conspiracy between the manufacturers and other distributors in order to establish a violation.
Hence, it has to be a concerted action and not an independent one. This exclusion of independent
action is based on the manufacturers general right to deal, or refusal to deal with whomever he
likes as long as he does it independently. In the case of United States v. Colgate & Co.12 it was
held that the manufacturer can announce its resale prices in advance and refuse to deal with those
who fail to comply, and a distributor is free to acquiesce in the manufacturers demand in order
to avoid termination.
11
Para 116 of the European Commissions Guidelines on Vertical Restraints (2000/C 291/01)
12
250 US 300, 307 (1919)
13

As far as evidence to prove the agreement is concerned, the plaintiff should present direct or
circumstantial evidence that reasonable tends to prove that the manufacturer and other had a
conscious commitment to a common scheme designed to achieve an unlawful objective. In the
case of American Tobacco Co. v. United States13 it was held that circumstances must reveal a
unity of purpose or a common design and understanding, or a meeting of minds in an unlawful
arrangement. The concept of a meeting of the minds or a common scheme in a distributortermination case includes more than a showing that the distributor conformed to the suggested
price. It means as well that evidence must be presented both that the distributor communicated its
acquiescence or agreement, and that this was sought by the manufacturer. In the case of
Monsanto Co. v. Spray-Rite Service Corp.14 it was held that the correct standard is that there
must be evidence that tends to exclude the possibility of independent action by the manufacturer
and distributor. That is, there must be direct of circumstantial evidence that reasonably tends to
prove that the manufacturer and the others had a conscious commitment to a common scheme
designed to achieve an unlawful objective.15
RULE OF REASON
The rule of reason is a doctrine developed by the US Supreme Court in its interpretation of the
Sherman Act. The rule, stated and applied in the case of Standard Oil Co. v. US16, is that only
combinations and contracts unreasonably restraining trade are subject to actions under the
antitrust laws and that size and possession of monopoly power are not illegal.
Some of Standard Oil's critics, including the lone dissenter Justice Harlan, argued that Standard
Oil and its Rule of Reason was a departure from previous Sherman Act case law, which
purportedly had interpreted the language of the Sherman Act to hold that all contracts restraining
trade were prohibited, regardless of whether the restraint actually produced no ill effects. These
critics emphasized in particular the Court's decision in United States v. Trans-Missouri Freight
Association17 which contains some language suggesting that a mere restriction on the autonomy
of traders would suffice to establish that an agreement restrained trade within the meaning of the
Act. Others argued that the decision and the principle it announced was entirely consistent with
13
328 US 781, 810 (1946)

465 US 752 (1984)
15
William Baxter, The Viability of Vertical Restraints Doctrine, 75 Cal. L. Rev. 933
16
221 US 1 (1911)
17
166 US 290 (1897)
14
14

earlier case law. It is opined that much language in Trans-Missouri Freight was dicta, and also
emphasis is placed on the Court's decision in United States v. Joint Traffic Association18 in
which the Court announced that ordinary contracts and combinations did not offend the
Sherman Act, because they merely restrained trade indirectly. The Court unanimously
reaffirmed the Rule of Reason in an opinion by Justice Brandeis, Chicago Board of Trade v.
United States19. The decision found that an agreement between rivals limiting rivalry on price
after an exchange was closed was reasonable and thus did not violate the Sherman Act.
On the same day the Supreme Court announced Standard Oil, it also announced United States v.
American Tobacco Co.20 That decision held that Section 2 of the Sherman Act, which bans
monopolization did not ban the mere possession of a monopoly, but instead banned only the
unreasonable acquisition and/or maintenance of monopoly.21
The rule was narrowed in later cases that held that certain kinds of restraints, such as price fixing
agreements, group boycotts, and geographical market divisions, were illegal per se. These
decisions followed up on Standard Oil's suggestion that courts can determine that certain
restraints are unreasonable based simply upon the "nature and character" of the agreement. More
recently, the United States Supreme Court has narrowed the category of restraints deemed
unlawful per se, thereby subjecting a greater number of restraints to fact-based rule of reason
analysis. For example, Continental TV v. GTE Sylvania22 held that courts should analyze nonprice vertical restraints under the Rule of Reason). The case of State Oil v. Khan23held that courts
should evaluate maximum resale price maintenance under the Rule of Reason. Leegin Creative
Leather Products, Inc. v. PSKS, Inc24overturned the per se restriction on minimum retail price
maintenance agreements. Moreover, the U.S. Supreme Court has reaffirmed Standard Oil's
conclusion that analysis under the Rule of Reason should focus on the economic, and not social,
consequences of a restraint. The Court also retained the per se rule against tying contracts,
although it has raised the threshold showing of market power that plaintiffs must make to satisfy
the rule's requirement of economic power.25
18
171 US 505 (1898)

246 US 231 (1918)
20
221 US 106 (1911)
21
Maurice Stucke, Does The Rule Of Reason Violate The Rule Of Law?, 42 U.C. Davis L. Rev. 1375
22
433 U.S. 36 (1977)
23
522 U.S. 3 (1997)
24
127 S. Ct. 2705 (2007)
25
Jefferson Parish Hospital District No. 2 v. Hyde 466 U.S. 2 (1985)
19
15

The European Court of Justice has adopted the concept in its own jurisprudence concerning the
free movement of goods within the European Common Market. The rule has arisen in the context
of Article 28 of the Treaty of Rome, which prohibits quantitative restrictions on imports (or
measures having equivalent effect). In Cassis de Dijon the ECJ drew a distinction between
measures in breach of Article 28 which were indistinctly applicable as opposed to distinctly
applicable. Indistinctly applicable measures are ones that, prima facie, do not favour domestic
producers over importers, and whose effects are equal on both. The ECJ argued that indistinctly
applicable measures that favoured domestic traders over importers were not necessarily in breach
of Article 28. They could be justified if they satisfied 'mandatory' requirements - namely that the
measure is necessary for protecting the public or the consumer. The rule of reason is essentially
the proposition that a proportionality exercise must be performed by the Court to determine
whether the effects of Member State legislation on the free movement of goods is justified in
light of the legislation's stated goals.26
In India, the agreements entered into amongst persons at different stages or levels of the
production chain in different market vis--vis production, supply, distribution, storage, sale or
price of, or trade in goods or services are not per se void provided that such agreements have no
appreciable adverse effect on competition. Such agreements are not prima facie illegal if they are
not likely to have appreciable adverse effect on competition. A vertical restraint on trade is not
per se void as such agreements may at times have pro-competitive effects. This is the major
distinguishing factor between horizontal and vertical anti-competitive agreements. Vertical
restraints are subject to rule of reason approach, which reflects the fact that such restraints are
not always harmful and may in certain cases produce beneficial effect in a particular market. An
adverse effect on competition can only be determined if it passes the litmus test of agreements or
arrangements that can manipulate a free and fair market. Rule of reason can be summarized so as
to assess the pro or anti competitive nature of vertical agreements; the competition authority will
evaluate the legality of the practice with reference to its economic effects on the relevant market
and the position of the operators in those markets. According to this rule, the fact-finder must
26
Ittai Paldor, The Vertical Restraints Paradox: Justifying the Different Legal Treatment of Price and Non-Price
Vertical Restraints, 58 U. Toronto L.J. 317
16

determine whether the restraint's anti-competitive effects unreasonably outweigh its potentially
pro-competitive effects
Section 3(1) of the Competition Act prohibits any agreement "which causes or is likely to cause
an appreciable adverse effect on competition within India," and s.3(2) holds such agreements to
be void. According to s.3(3), certain agreements (price-fixing, output restricting, market-sharing,
or bid-rigging, generally known as "hard-core" cartels) are presumed to have an appreciable
adverse effect on competition (hereafter AAEC). There are divergent views whether this
amounts to a per se prohibition on this, even amongst those responsible for the Act. It is
considered to be "similar, but not necessarily identical to, the per se rule in the United States,"
because there is a long-established tradition in Indian law to treat a "presumption" as rebuttable.
However, if a per se prohibition was intended, s.3(3) would have stated that such agreements
were deemed to have an anticompetitive effect. Indian courts defer to the legislative intent
behind such "deeming clauses" or "statutory fictions," unless they violate the Constitution. The
Supreme Court made this quite clear in respect of the provision in s.3(1) of the MRTP Act
whereby certain agreements--including those involving hard-core cartel activities--were deemed
to be restrictive.
On the other hand, a former MRTPC member who was associated with the drafting of the
Competition Act believes that it does make the agreements described in s.3(3) per se illegal, and
there is "almost no scope for errant enterprises to rebut the presumption of illegality." However,
matters are not that straightforward, for s.19(3) further muddies the waters. To understand why,
it needs to be quoted in full:
19(3): The Commission shall, while determining whether an agreement has an appreciable
adverse effect on competition under section 3, have due regard to all or any of the following
factors, namely:-(a) creation of barriers to new entrants in the market;
(b) driving existing competitors out of the market;
(c) foreclosure of competition by hindering entry into the market;
(d) accrual of benefits to consumers;
(e) improvements in production or distribution of goods or provision of services;
17

(f) promotion of technical, scientific and economic development by means of production or

distribution of goods or provision of services.
Now, criteria (a)-(c) help to determine whether an agreement has an AAEC, but (d)-(f) do not:
they instead provide various arguments that can be used to justify such agreements. Note that
s.19(3) is applicable to all of s.3, including the hard-core cartel activities listed in subsection
3(3). It might seem that the phrase "while determining whether an agreement has an appreciable
adverse effect on competition" steers s.19(3) away from such activities, which are presumed to
be anticompetitive. But if this presumption is rebuttable, then even if the rebuttal is unsuccessful,
the words "while determining ..." open the door to applying criteria (d)-(f) even to an
anticompetitive cartel. Further, an "Explanation" attached to s.3(3) excludes from the
presumption of an AAEC those joint ventures that increase "efficiency in production, supply,
distribution, storage, acquisition or control of goods or provision of services." A hard-core cartel
that operates through a common sales or buying agency that results in cost savings could exploit
this proviso along with the clauses in s.19(3). One way or another, therefore, many cartels are
likely to escape per se prohibition.
As for vertical restrictions, s.3(4) of the Act holds that any such agreement, including five
specific types (tying, exclusive supply, exclusive distribution, refusal to deal, and resale price
maintenance), shall be in contravention of the prohibition in s.3(1) if it results in an AAEC.
Recall that these are treated as restrictive per se in the MRTP Act. Section 3(5)(i) provides that
nothing in s.3 shall restrict the right of any person to impose "reasonable" conditions to protect
the intellectual property rights (IPRs) recognized by six listed IPR laws.
In devising a rule of reason for this entire range of potentially anticompetitive agreements, the
CCI will presumably be guided by criteria (d)- (f) of s.19(3). But these are problematic. They
appear to be a simplistic adaptation of Article 81(3) EC, which permits exemptions for
efficiency-enhancing agreements and concerted practices. The EC provisions, however, impose
additional conditions: they require that the agreement or practice allows consumers to share in
the benefits, does not impose restrictions that are unnecessary to attaining the efficiency
objective, and does not substantially eliminate competition. All of these conditions are
18

mandatory, whereas those in the Indian Competition Act are permissive. The European
Commission, moreover, has given "block exemptions" to certain kinds of agreements. In India,
under s.54 of the Competition Act, the government (not the CCI) can exempt "any class of
enterprises if such exemption is necessary in the interest of security of the State or public
interest," or "any practice or agreement arising out of" any obligation under an international
treaty. Efficiency-enhancing agreements do not figure here, so they can only be subject to caseby-case consideration, in a context in which there is very little comprehension of the economics
of such agreements.27
27
Aditya Bhattacharjea, India's New Competition Law: A Comparative Assessment, 4 J. Competition L. & Econ.
609
19

____________________________________________________________________________
Chapter Two: DIFFERENCES BETWEEN VERTICAL AND HORIZONTAL ANTICOMPETITIVE AGREEMENTS
Horizontal and Vertical Anti-Competitive Agreements are very different and easily
distinguishable. The difference between the two has been highlighted through the table below:-
HORIZONTAL
ANTI-COMPETITIVE VERTICAL
AGREEMENTS
ANTI-COMPETITIVE
AGREEMENTS
In Horizontal Agreements the parties to the In Vertical Agreements the parties to the
agreement are enterprises at the same stage agreements are non-competing enterprises
of the production chain engaged in similar at different stages of the production chain.
trade of goods or provision of services For e.g. agreements essentially between
manufacturers and suppliers i.e. between
competing in the same market.
For e.g. agreements between producers or producers and wholesalers or between

between wholesalers etc.
manufacturers and retailers etc.
Horizontal Anti-Competitive Agreements Vertical Anti-Competitive Agreements are

are
entered
competitors.
into
between
rivals
or entered into between parties having actual

or potential relationship of purchasing or
selling to each other.

are per se void.
not per se void.

20

The rule of presumption is applied to The rule of reason is applied to vertical

horizontal anti-competitive agreements.
anti-competitive agreements.

that determine prices or limit/control not presumed to have an appreciable
production or share market/sources of adverse
effect
production by market allocation or result in automatically
on
competition
prohibited.
Whether
and
a
bid rigging or collusive bidding are vertical agreement is anti-competitive or

presumed to have an appreciable adverse not is to be decided on a case by case basis
effect on competition.
considering
the
consequences
of the
agreement and whether they substantially

restrict competition or not.
The burden of proof is on the defendant to The burden of proof is on the party alleging
prove that the agreement is not anti- the anti-competitive practice to prove that
competitive.
the agreement is anti-competitive.
Examples of Horizontal Anti-Competitive Examples of Vertical Anti-Competitive

Agreements
are
cartels,
collusive tendering etc.
bid-rigging, Agreements are resale price maintenance,

tie-in agreements, exclusive supply and
distribution agreements etc.
21

______________________________________________________________________________
Chapter Three: TIE-IN ARRANGEMENTS
The Competition Act, 2002 has defined tie-in agreements as inclusive of any agreement
requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods.
The definition as can be seen is very simple and lacks details or specification as to what nature of
tie-in agreement are considered anticompetitive.
US POSITION
The Sherman Act, on the other hand, defines tying agreements as an agreement by a party to sell
one product but only on the condition that the buyer also purchase a different product or agree
that he will not buy that product from another supplier. The Sherman Act also contains a
corollary which specifies that an agreement by which the buyer is prohibited from buying that
product from another supplier. Certain tie-ins may also violate Section 3 of the Clayton Act.
Under US Law, a claim of per se illegal tying has to fulfil the following requirements:(a) Separate tying and tied products The tying and tied products have to be separate and
distinct and cannot be mere components of a single product.
(b) Tying condition The tying product must have been sold on the condition that the purchaser
take the sellers tied product.
(c) Nontrivial tied sales A substantial amount of the tied product must be foreclosed and there
must be a nontrivial amount of sales in the ties product.
22

(d) Tying market power The defendant must have market power in the tying market. In the
case of Jefferson Parish28 the Court held that a market share of even 30% was not enough.
Even when these four elements are proven, then also a tie can probably escape condemnation is
cases where the tie has a procompetitive justification that cannot be adequately furthered by a
less restrictive alternative and that offsets any anticompetitive harm. On the other hand, even if
per se illegality cannot be proven, bundling can generally still be challenged under the rule of
reason.
Sales practice forbidden by Section 3 of the Clayton Act in which a marketer uses economic
dominance over the supply of one product to force customers to purchase another product,
thereby competing unfairly. For example, the sole manufacturer of a patented pharmaceutical
who restricts sale of that drug to customers who also purchase another nonpatented drug. In the
absence of a monopoly, it has been difficult for the courts to prove that economic dominance
exists and the mere existence of a patent is not adequate evidence. The law remains that when the
direct, immediate and intended effect of a contract or combination among dealers in a
commodity is the enhancement of its price, it amounts to a restraint of trade in the commodity,
even though contracts to buy it at the enhanced price are being made.29
EUROPEAN POSITION
Article 81(1) of the EC Treaty includes as agreements that which are incompatible with the
common market and the agreements that make the conclusion of contracts subject to acceptance
by the other parties of supplementary obligations which, by their nature or according to
commercial usage, have no connection with the subject of such contracts. Article 82 includes
tying as an abuse of dominant position, thus Article 81 is attracted when tying is part of an
agreement concluded by a non-dominant supplier and a buyer. However, Regulation 2790/1999
on Vertical restraints provides for a safe harbour system whereby vertical agreements involving
28
29
466 US 2
Addyston Pipe and Steel Company v. United States 175 U.S. 211
23

tying will be presumed compatible with article 81 if the market share of the supplier is below
30% in the relevant market.30
Tying agreements are not illegal per se. An illegal tying agreement takes place when a seller
requires a buyer to purchase another, less desired or cheaper product, in addition to the desired
product, so that the competition in the tied product would be lessened. Sherman act also pointed
out that there should be separateness of products which are tied because if the products are
identical and market is same then there is no unlawful tying agreement.
There are various kinds of tying agreements like
Requiring dealer to take unwanted products
Parts tied to sale i.e. the owner of a patent cannot expand the patent monopoly by
attaching conditions to its use.
Supplies tied to sale or license, it means that the mere possession of a patent does not
authorize a patentee to condition a license to use the patent so as to tie the use of patented
device or process which lie outside the patent monopoly.
Services tied to sale. In this the Supreme Court is unwilling to accept that an unlawful
tying agreement cannot have separate markets for service and parts but the other courts
have observed that publics demand for a product is closely related to, but legally
separable from, its demand for installation of the product.
Credit tied to sale. In this a credit corporation which is manufacturers subsidiary violates
Sherman act by conditioning its grant of credit to a borrower on the borrowers
agreement to purchase the manufacturers product.
All these tying agreements are not explained in the Competition Act, 2002. Mere definition
of tie-in agreement is given which would not suffice.
Moreover Sherman Act has also included Reciprocal Dealing arrangements where two parties act
as both buyer and seller. It is basically of two types (a) voluntary (b) coercive. Coercive is
similar to tying agreements and is violative of Sherman Act.
30
Ioannis Lianos, Vertical Restraints, and the Limits of Article 81(1) EC: Between Hierarchies And Networks, 3 J.
Competition L. & Econ. 625
24

The negative effects of tying may be discussed under the following heads:(1) Price discrimination Price discrimination that increases monopoly profits is possible if
the buyers do not use the tied product in a fixed proportion to the tying product. Here, the
discrimination is between the persons having different levels of usage of the tied product.
To illustrate with an example, assume that a monopolist is selling a capital product like a
printer with its correlated consumable say paper. Obviously, usage of paper varies from
one consumer to another depending on the number of print-outs that they need. The
monopolist could in such a situation lower the cost of the printer to marginal cost
contingent on the buyers purchasing all their paper from him. The monopolist could then
set the price of the paper well above the marginal cost and profit from that transaction.
This way, the consumers using more paper shall pay a higher price than those using a
lesser amount of paper. Hence, the monopolist engages in price discrimination between
persons depending on their usage of the tied product in situation where all consumers do
not use the same ascertained amount of the tied product.
Another form of price discrimination that might occur in cases of tying takes place when
the buyers do not necessarily use the bundled products together. Assuming again that the
firm is a monopolist in two products, A and B which cost the same to manufacture.
Suppose that there are a bunch of buyers who value A at 20 Rs. and B at 12 Rs. and there
are some buyers who value A at 12 Rs. and B at 20 Rs. If the monopolist has to price the
products separately then he cannot distinguish between buyers who value the product
differently, and shall have to sell both the products for 20 Rs. respectively and he will
earn 20.00 Rs. However, if the monopolist is bundling the two products together then he
will sell both A and B for 32 Rs. and will earn 24,000 Rs. Therefore, this bundling allows
the monopolist to profitably price discriminate when buyer preferences between product
A and product B are not positively correlated.
However, for both the above types of price discrimination to take place, it is a prerequisite that the firm has market power in the tying market. However, such price
discrimination can have ambiguous effects in efficiency and consumer welfare. These
agreements may also at times allow an increase in output that will efficiently serve
marginal buyers who would otherwise have not been able to buy the tying product if it
25

were just sold at a separate price. However, it has to be kept in mind that been tying can
increase monopoly profits.31
(2)
Another worrisome outcome of tie-in arrangements is when there is a demand for

multiple units of the tying product and not the tied product. In such a scenario, the seller
might use bundling as a means to push off slow moving products as tied products.
Alternatively, a monopolist of the tying product can thus maximize profits by squeezing
out that consumer surplus without losing customers by making the tying product
unavailable unless buyers take a tied product form it at a price above the tied market
price. Hence, either ways, however the monopolist decides to handle the situation, the
consumer will either be faced to pay a premium for the product or pay for and buy
products that he does not need.
(3) Tying can also increase market power in the tied market by foreclosing enough of the tied
market to reduce rival entry, efficiency, existence or expandability. Tying can create the
afore-mentioned anticompetitive effects if one relaxes the unrealistic assumption that tied
market rivals face no fixed costs, have constant marginal costs that do not at all depend
on output, and can expand instantaneously to supply to the whole market. For instance, if
there are costs to entering a market, it is profitable for a firm that makes two products to
bundle them to deter entry by an equally efficient rival that can only enter one of those
markets. The reason is that the bundle leaves less of the market available to then rival,
and thus can make the profits of entry lower than the costs of entry. 32
(4) Tying can increase tying market power by impeding entry and expansion from the tied
market or buyer substitution to it. Suppose that, instead of being fixed, a firms current
tying market power is vulnerable to an increased threat of future entry if successful rival
producers exist in the tied market. If so, then the firm has incentives to engage in
defensive leveraging, foreclosing the tied market with bundling in order to deter or delay
entry in to the tying market, thus maintaining its market power or preserving for longer
than it otherwise could. Thus, if successful producers in the tied market are more likely
to evolve into producers in the tying market in future periods, then it can be profitmaximizing for a firm to use bundling to foreclose rivals in the tied market in order to
31
32
Einer Elhuage, Tying, Bundled Discounts and the Single Monopoly Profit Theory, 123 Harv. L. Rev. 397
Edwin Hughes, The Left Side Of Antitrust: What Fairness Means And Why It Matters, 77 Marq. L. Rev. 265
26

prevent or reduce the erosion of its tying market power over time. It would also be
pertinent to highlight here that defence leveraging has even stronger and more immediate
anticompetitive effects if a firms tying market power is constrained by the fact that the
tied product is a partial substitute to it or if the technological trend is from the market
where the firm has market power to the market where the foreclosure is occurring.
However, if there is neither a tying market power nor substantial tied market foreclosure, then
none of the anticompetitive effects may occur. Sometimes, tying may take place solely due
considerations of efficiency. At times, bundling two products might lower cost or increase value.
Two products may be cheaper to make or distribute together, or they may be more valuable to
the buyer if the seller bundles them than if the buyer does. Another benefit that might arise from
bundling is the improvement of quality. Sometimes the seller of the tying product might require
that buyer use its tied product with it because they worry that buyers will otherwise use an
inferior substitute and they will make the tying product work less well and lower its brand
reputation. Lastly, tying may also be used as a mechanism to shift financing or risk-bearing costs
by the firm that can minimize them.33
33
Einer Elhauge & Damien Geradin, Global Competition Law and Economics, Hart Publishing, USA, First Edn.
Reprint, 2008, 498-505
27

_____________________________________________________________________________
Chapter Four: EXCLUSIVE SUPPLY AND DISTRIBUTION AGREEMENTS
An Exclusive supply agreement is an agreement restricting in any manner the purchase in the
course of his trade from acquiring or otherwise dealing in any goods other than those of the seller
or any other person. The purpose in forbidding contracts of sale, made upon the agreement or
understanding that the purchaser shall not deal in the goods of the sellers competitor, which may
adversely affect competition, is not to prohibit the mere possibility of that consequence, but to
prevent agreement, which in circumstances will probably affect competition.
Exclusive distribution agreements includes any agreement to limit, restrict or withhold the
output, supply of any goods or allocate any area or market for the disposal of sale of the goods.
Imposing restriction concerning where or to whom or in what form or quantities of goods
supplied or other goods may be resold, could be anti-competitive that is exclusive territory or
territorial market restriction. Such restriction is found in agreement by which a manufacturer
restricts the retailers to competing on the distribution of its products.
Exclusive dealing agreements are a form of second-degree price discrimination, similar to

requirements tie-in sales. The purpose of exclusive dealing arrangements on the basis of specific
territory and specific type of customer is to insulate particular markets one from the other,
allowing adoption of differential pricing according to the level each market could bear. In
exclusive dealing agreements, a buyer agrees to purchase all of its requirements for some product
or service from one suppliers. Exclusive dealing refers to when a retailer or wholesaler is tied
to purchase from a supplier on the understanding that no other distributor will be appointed or
receive supplies in a given area. When the sales outlets are owned by the supplier, exclusive
dealing is because of vertical integration, where the outlets are independent exclusive dealing is
illegal in the US due to the Restrictive Trade Practices Act, however, if it is registered and
approved it is allowed. Exclusive dealing can be a barrier to entry.
28

Arrangements between the supplier and his distributor often involve the allocation of specific
territory or specific type of customer where and with whom the distributor can deal. For
example, a distributor might be restricted to sale of the product in question in bulk from the
wholesalers or only to selling directly to retail outlets. The purpose of such restriction is usually
to minimise intra-brand competition by blocking parallel trade by third parties. The effect of
such restrictions are manifested in prices and conditions of sale, particularly in the absence of
strong inter brand competition in the market, Nevertheless, restriction on intra brand competition
may be benign or pro competitive if the market concerned has significant competition between
brands.34
The EU Guidelines define the exclusive agreements as below. In an exclusive distribution

agreement, the supplier agrees to sell his products only to one distributor for resale in a particular
territory. At the same time, the distributor is usually limited in his active selling into other
exclusively allocated territories. The possible competition risks are mainly reduced intra-brand
competition and market partitioning, which may in particular facilitate price discrimination.
When most or all of the suppliers apply exclusive distribution, this may facilitate collusion, both
at the suppliers' and the distributors' level. In an exclusive customer allocation agreement, the
supplier agrees to sell his products only to one distributor for resale to a particular class of
customer. At the same time, the distributor is usually limited in his active selling into other
exclusively allocated classes of customer. The possible competition risks are mainly reduced
intra-brand competition and market partitioning, which may in particular facilitate price
discrimination. When most or all of the suppliers apply exclusive customer allocation, this may
facilitate collusion, both at the suppliers' and the distributors' level. Selective distribution
agreements, like exclusive distribution agreements, restrict the number of authorised distributors,
on the one hand, and the possibilities of resale on the other. The difference vis--vis exclusive
distribution is that the restriction of the number of dealers does not depend on the number of
territories but on selection criteria linked in the first place to the nature of the product. Another
difference vis--vis exclusive distribution is that the restriction on resale is not a restriction on
active selling to a territory but a restriction on any sales to non-authorised distributors, leaving
34
David Gerber, Competition Law, 50 Am. J. Comp. L. 263
29

only appointed dealers and final customers as possible buyers. Selective distribution is almost
always used to distribute branded final products. The possible competition risks are a reduction
in intra-brand competition and, especially in cases of cumulative effect, foreclosure of a certain
type or types of distributor and facilitation of collusion between suppliers or buyers. Exclusive
supply means that there is only one buyer inside the Community to which the supplier may sell a
particular final product. For intermediate goods or services, exclusive supply means that there is
only one buyer inside the Community or that there is only one buyer inside the Community for
the purposes of a specific use. For intermediate goods or services, exclusive supply is often
referred to as industrial supply. The main competition risk of exclusive supply is the foreclosure
of other buyers.35
35
Sandra Ferson Young, An International Antitrust Dilemma: An Analysis of The Interaction of Antitrust Laws in
the United States and the European Union, 36 J. Marshall L. Rev. 271
30

_____________________________________________________________________________
Chapter Five: REFUSAL TO DEAL
Refusal to deal includes any agreements which restricts, or is likely to restrict, by any method the
persons or classes of persons to whom goods are sold or from whom goods are bought. Refusal
to deal per se is also applicable where there is concerted refusal. Concerted refusal is an
agreement or concerted action not to do business freely or to withhold supplies or purchases
from one or more specified, or class of, suppliers or purchasers. This is called collective refusal.
A group boycott, on the other hand, is a type of secondary boycott in which two or more
competitors in a relevant market refuse to conduct business with a firm unless the firm agrees to
cease doing business with an actual or potential competitor of the firms conducting the boycott. It
is a form of refusal to deal, and can be a method of shutting a competitor out of a market, or
preventing entry of a new firm into a market. In the United States, such conduct can be held to
violate the Sherman Act. Depending upon the nature of the boycott, the courts may either apply
the rule of reason or hold that the boycott is illegal per se. It may also be considered a form of
civil conspiracy.
In US certain agreements are unlawful per se in that they are so harmful to competition and so
rarely justified that antitrust laws do not require proof the agreement is anticompetitive. The per
se rule, however, is limited in the boycott context to cases involving horizontal agreements. The
Courts have defined horizontal agreements, or group boycotts, as those involving a group of
competitors threatening to withhold business from third parties unless they help injure the
group's direct competitors. The Courts pointed to precedent declining to apply the per se rule to
vertical restraints between a single supplier and customer. The Courts said application of the per
se rule where the buyer's decision, though not based on competitive reasons, comprises part of a
regulatory fraud would transform cases involving improper business behavior, such as nepotism,
into treble damages antitrust cases. That would discourage firms from changing suppliers, a
31

process antitrust laws seek to encourage. The plaintiff must allege and prove harm to the
competitive process because the per se rule is inapplicable to a buyer purchasing goods and
services from one supplier rather than another.36
However, it has to be noted here that group boycott and refusal to deal are distinct. The essential
element of a group boycott is collective action. A group boycott occurs when there is agreement
among competing brokers or companies to avoid working with another competitor, thereby
reducing that competitors business. It was held in the case of KOS v. Alyeska Pipeline Service
Co.37 that a group boycott requires that competitors combine to exclude a would-be competitor
by threatening to withhold their businesses from firms that deal with the potential competitor. In
this case, the Supreme Court dismissed a trucking firms allegation of a concerted refusal to deal
by its customers, a consortium of oil companies. The trucking firm did not compete with the
defendant oil companies and it is therefore impossible for the defendants to have combined to
boycott it. The Court suggested that even if the plaintiff alleged an agreement between one of its
competitors and the defendants to exclude the plaintiff, the claim would fail absent an element of
economic coercion by the plaintiffs competitor forcing the defendants not to do business with
the plaintiff.
In Odom V. Fairbanks Memorial Hospital38 the Supreme Court reversed the Trial Courts
determination to grant a motion to dismiss in a case involving allegations of antitrust violations
under a group boycott theory. The Court noted that group boycotts constitute per se violations of
the Sherman Act and the three characteristics that are indicative of per se illegal boycotts are:
The boycott cuts off access to a supply, facility or market necessary to enable the victim
firm to compete
The boycotting firm possesses a dominant market position
The practices are not justified by plausible arguments that they enhanced overall
efficiency or competition.
Hence, the persons restricting competition must be in direct competition with the plaintiff and
only then can it be a case of group boycott. However, if that were the situation it would no longer
36
NYNEX Corp. v. Discon, Inc., 119 S. Ct. 493 (1998)

676 P. 2d 1069
38
999 P.2d 123
37
32

be a vertical agreement and hence is different from refusal to deal which is a vertical anticompetitive agreement.39
39
Richard Posner, The Rationalization of Antitrust, 116 Harv. L. Rev. 917
33

_____________________________________________________________________________
Chapter Six: RESALE PRICE MAINTENANCE
Under the heading of resale price maintenance come those agreements whose main element is
that the buyer is obliged or induced to resell not below a certain price, at a certain price or not
above a certain price. This group comprises minimum, fixed, maximum and recommended resale
prices. Maximum and recommended resale prices, which are not hardcore restrictions, may still
lead to a restriction of competition by effect.
There are two main negative effects of RPM on competition:
i. a reduction in intra-brand price competition, and
ii. increased transparency on prices.
In the case of fixed or minimum RPM, distributors can no longer compete on price for that
brand, leading to a total elimination of intra-brand price competition. A maximum or
recommended price may work as a focal point for resellers, leading to a more or less uniform
application of that price level. Increased transparency on price and responsibility for price
changes makes horizontal collusion between manufacturers or distributors easier, at least in
concentrated markets. The reduction in intra-brand competition may, as it leads to less
downward pressure on the price for the particular goods, have as an indirect effect a reduction of
inter-brand competition.
Although restricted to cases where an actual agreement can be shown, price fixing agreements
between sellers and purchasers for resale have traditionally been considered per se violations.
Even where resale price restrictions are imposed against the purchaser's will, a 'combination or
conspiracy' may be found from the purchaser's compliance or from the manufacturer's refusal to
sell at the request of a competitive purchaser. The Supreme Court recently declined to review
whether to discontinue the per se rule's application to resale price maintenance in such cases.
34

However, a seller can simply suggest resale prices or unilaterally refuse to sell to someone for
reasons of their own. Recent cases have also upheld a manufacturer's offer of a reduction from
its normal price to a distributor on the condition that the distributor pass it on to the ultimate
purchaser in specific resale transactions.
In June 2007, the U.S. Supreme Court turned almost 100 years of competition law on its head
with its decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc.40In addition to its
dismissal of the near-century-old application of a per se rule to resale price maintenance , the
decision drove a deep wedge between the manner in which vertical price fixing is treated in the
United States and under the rest of the world's competition law regimes. The divergence between
the postures of the European Community and the United States may be approached only by the
internal divergence between the U.S. Supreme Court and federal enforcement officials on the
one hand, and the state attorneys general on the other.
The path through the tangled branches of the vertical price fixing thicket was a torturous one for
the so-called per se rule in antitrust analysis of vertical arrangements. It wended its way from the
birth of the application of per se treatment of vertical price fixing in Dr. Miles Medical Co. v.
Park & Sons Co41 involving "patent medicines" through the antitrust exemptions for state "Fair
Trade" laws provided by the Miller-Tydings Act and the McGuire Act and their eventual repeal.
It continued on through the condemnation of consignment arrangements in the sale of motor fuel
in Simpson v. Union Oil Co.42 and finally of maximum resale price maintenance in Albrecht v.
Herald43 in 1968, which eventually led to the 1997 decision in State Oil Co. v. Kahn44, in which
the Supreme Court removed the per se label from maximum vertical price fixing, but stated that
"arrangements to fix minimum prices . . . remain illegal per se."
Minimum resale price maintenance persisted as a per se antitrust offense in the U.S. antitrust
jurisprudence for a scant ten more years until the Supreme Court concluded in 2007 in Leegin
that "the Court's more recent jurisprudence has rejected the rationales on which Dr. Miles was
based" and that "the rule of reason, not a per se rule of unlawfulness . . . [is] the appropriate
40
127 S. Ct. 2705 (2007)

220 US 373, 408 (1911)
42
377 US 13, 24 (1964)
43
390 US 145 (1968)
44
522 US 3 (1997)
41
35

standard to judge vertical price restraints." The Court noted some factors relevant to a rule of
reason inquiry into situations involving vertical price restraint. These include the pervasiveness
of the retail price restraint in an industry, the source of the restraint, and the market dominance of
the manufacturer and/or the retailer(s). The Court specifically noted that "[i]f there is evidence
that retailers were the impetus for a vertical price restraint, there is a greater likelihood that the
restraint facilitates a retailer cartel or supports a dominant, inefficient retailer." Interestingly, a
retailer cartel was the underlying basis for the original decision in Dr. Miles.
Although U.S. antitrust law has thus moved into consonance with broadly held economic theory,
RPM, at least minimum RPM, remains a per se offense and "prohibited, in one form or another,
by all modern competition law regimes."45
Although the Court previously departed from the per se rule in other cases, its most significant
departure occurred in Leegin Creative Leather Products, Inc. v. PSKS, Inc. in 2007. The Leegin
decision limited the per se approach to horizontal price restraints in addition to overruling longstanding antitrust law precedent. The Leegin decision simultaneously created a more liberal
application of the rule of reason by recognizing the pro-competitive benefits of vertical price
restraints once disregarded by the Court. The implications of this holding, although not yet fully
understood, will be significant for both producers and dealers.46
The rule of reason standard might prove difficult in its application to retail price maintenance
schemes, particularly where the entity employing the restraint does not exhibit large market share
or the ability to manipulate price. Accurately determining the precise economic implications of a
given retail price maintenance scheme is a challenge for any court. Not only are courts illequipped to separate economic fact from fiction, but the nature of retail price maintenance
requires extensive case-by-case analysis that federal courts are admittedly reluctant to conduct.
Furthermore, market share serves as one of the key pieces of circumstantial evidence indicative
of improper intent and is not present where small-scale market players employ restraints. In sum,
45
Francis Devlin, Resale Price Maintenance and Leegin: Opening Pandora's Box in Global Competition Law, 31
Hous. J. Int'l L. 565
46
Jordan Dresnick & Thomas Ronzetti, Vertical Price Agreements In The Wake Of Leegin V. Psks: Where Do We
Stand Now, 64 U. Miami L. Rev. 229
36

application of the rule of reason to vertical minimum price restraints employed by producers
without notable market share presents a fundamentally flawed task for lower federal courts.
There is strong argument, therefore, to suggest that vertical minimum price restraints continue to
constitute a per se violation of the Sherman Act. Although resale price maintenance does not
necessarily exhibit manifestly anti-competitive effects as the Supreme Court suggests are
required for per se violations, the mere possibility of pro-competitive effects may prove
insufficient to warrant use of the rule of reason. Furthermore, other price and non-price restraints
already assessed under the rule of reason may be used to achieve the same results as vertical
minimum price restraints. The Court could have avoided potential confusion by maintaining the
status quo and applying a bright-line test of per se illegality. 47
47
Jason Casey, Rule of Reason After Leegin: Reconsidering the use of Economic Analysis in The Antitrust Arena, 42
Suffolk U. L. Rev. 919
37

_____________________________________________________________________________
Chapter Seven: OTHER TYPES OF VERTICAL ANTI-COMPETITIVE AGREEMENTS
Some other types of vertical anti-competitive agreements that do not find express mention in the
Competition Act, 2002 are discussed below.
Reciprocal Dealing - Reciprocal dealing, such as where a purchaser refuses to buy unless
the seller buys something else from the purchaser, can be viewed as the 'mirror image' of
tying. Some courts have suggested that it be treated on a per se basis, although the US
Supreme Court has not ruled on the question. While transactions involving little more
than barter arrangements should generally not run afoul of the antitrust laws, transactions
involving coercion involve significant legal risks.
Franchising - Franchise agreements contain licences of intellectual property rights

relating in particular to trade marks or signs and know-how for the use and distribution of
goods or services. In addition to the licence of IPRs, the franchiser usually provides the
franchisee during the life of the agreement with commercial or technical assistance. The
licence and the assistance are integral components of the business method being
franchised. The franchiser is in general paid a franchise fee by the franchisee for the use
of the particular business method. Franchising may enable the franchiser to establish,
with limited investments, a uniform network for the distribution of his products. From the
competition viewpoint, in addition to provision of the business method, franchise
agreements usually contain a combination of different vertical restraints concerning the
products being distributed, in particular selective distribution and/or non-compete and/or
exclusive distribution or weaker forms thereof.
Single branding - Single branding results from an obligation or incentive which makes
the buyer purchase practically all his requirements on a particular market from only one
supplier. It does not mean that the buyer can only buy directly from the supplier but that
he will not buy and resell or incorporate competing goods or services. The possible
38

competition risks are foreclosure of the market to competing and potential suppliers,
facilitation of collusion between suppliers in cases of cumulative use and, where the
buyer is a retailer selling to final consumers, a loss of in-store inter-brand competition.
39

______________________________________________________________________________
BIBLIOGRAPHY
ARTICLES
Aditya Bhattacharjea, India's New Competition Law: A Comparative Assessment, 4 J.

Competition L. & Econ. 609
Francis Devlin, Resale Price Maintenance and Leegin: Opening Pandora's Box in Global
Competition Law, 31 Hous. J. Int'l L. 565
Ioannis Lianos, Vertical Restraints, and the Limits of Article 81(1) EC: Between
Hierarchies And Networks, 3 J. Competition L. & Econ. 625
Ittai Paldor, The Vertical Restraints Paradox: Justifying the Different Legal Treatment of
Price and Non-Price Vertical Restraints, 58 U. Toronto L.J. 317
Jordan Dresnick & Thomas Ronzetti, Vertical Price Agreements In The Wake Of Leegin
V. Psks: Where Do We Stand Now, 64 U. Miami L. Rev. 229
Maurice Stucke, Does The Rule Of Reason Violate The Rule Of Law?, 42 U.C. Davis L.
Rev. 1375
Richard Buxbaum, Antitrust Regulation Within The European Economic Community, 61

Colum. L. Rev. 402
Richard Posner, The Rationalization of Antitrust, 116 Harv. L. Rev. 917
William Baxter, The Viability of Vertical Restraints Doctrine, 75 Cal. L. Rev. 933
Einer Elhuage, Tying, Bundled Discounts and the Single Monopoly Profit Theory, 123
Harv. L. Rev. 397
Edwin Hughes, The Left Side Of Antitrust: What Fairness Means And Why It Matters, 77
Marq. L. Rev. 265
David Gerber, Competition Law, 50 Am. J. Comp. L. 263
40

Sandra Ferson Young, An International Antitrust Dilemma: An Analysis of The

Interaction of Antitrust Laws in the United States and the European Union, 36 J.
Marshall L. Rev. 271
Jason Casey, Rule of Reason After Leegin: Reconsidering the use of Economic Analysis
in The Antitrust Arena, 42 Suffolk U. L. Rev. 919
ACTS/BOOKS/DOCUMENTS
Einer Elhauge & Damien Geradin, Global Competition Law and Economics, Hart
Publishing, USA, First Edn. Reprint, 2008
Clayton Act
Competition Act, 2002
EC Treaty
European Commissions Guidelines on Vertical Restraints
Federal Trade Commission Act
MRTP Act, 1969
Robinson-Patman Act
Sherman Act
WEBSITES
www.jstor.org
www.manupatra.com
www.westlaw.com
www.wikipedia.com
41

Dissertation Preethi 20100226123251

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Dissertation Preethi 20100226123251

Uploaded by

Copyright:

Available Formats

Generated by Foxit PDF Creator Foxit Software

http://www.foxitsoftware.com For evaluation only.

Generated by Foxit PDF Creator Foxit Software

Generated by Foxit PDF Creator Foxit Software

All India Reporter

American Journal of Competition Law

California Law Review

Columbia Law Review

Harvard Law Review

Houston Journal of International Law

J. Competition L. & Econ.

Journal of Competition Law and Economics

Monopoly Restrictive Trade Practices

Resale Price Maintenance

Suffolk University Law Review

University of Miami Law Review

University of Toronto Law Journal

United States of America

Generated by Foxit PDF Creator Foxit Software

Title of the Chapter

DIFFERENCES BETWEEN VERTICAL AND HORIZONTAL ANTICOMPETITIVE AGREEMENTS

EXCLUSIVE SUPPLY AND DISTRIBUTION AGREEMENTS

RESALE PRICE MAINTENANCE

Generated by Foxit PDF Creator Foxit Software

Chapter One: UNDERSTANDING OF VERTICAL ANTI-COMPETITIVE AGREEMENTS

European Commissions Guidelines on Vertical Restraints (2000/C 291/01)

Generated by Foxit PDF Creator Foxit Software

Market share in the relevant market3

Strength of remaining competition

Whether the action springs from business requirements or purpose to monopolise

Probable development of the industry, consumer demands, and other characteristics of

Agreements that are entered into with the sole

DGIR v. UB-MEC Batteries [1996] 87 Comp.Cas 891 (MRTPC)

Generated by Foxit PDF Creator Foxit Software

Subhash Chandra v. Ganga Prasad AIR 1967 SC 878

Generated by Foxit PDF Creator Foxit Software

Generated by Foxit PDF Creator Foxit Software

Secondly, the Commission has agreed to exempt 'Agreements of minor importance'

Generated by Foxit PDF Creator Foxit Software

tablissements Consten S..R.L. and Grundig-Verkaufs-GmbH v. Commission of the European Economic

Generated by Foxit PDF Creator Foxit Software

Foreclosure of other suppliers or buyers by raising barriers to entry

Reduction of intra brand competition between distributers of the same brand

The creation of obstacles to market integration.10

Similarly the Guidelines also identify certain positive effects such as

To "open up or enter new markets". Where a manufacturer wants to enter a new

Generated by Foxit PDF Creator Foxit Software

The so-called "hold-up problem". Sometimes there are client-specific investments to be

"Economies of scale in distribution". In order to have scale economies exploited and

Generated by Foxit PDF Creator Foxit Software

REQUIREMENTS OF A VERTICAL ANTICOMPETITIVE AGREEMENT

250 US 300, 307 (1919)

Generated by Foxit PDF Creator Foxit Software

328 US 781, 810 (1946)

Generated by Foxit PDF Creator Foxit Software

171 US 505 (1898)

Generated by Foxit PDF Creator Foxit Software

Generated by Foxit PDF Creator Foxit Software

Generated by Foxit PDF Creator Foxit Software

(f) promotion of technical, scientific and economic development by means of production or

Generated by Foxit PDF Creator Foxit Software

Generated by Foxit PDF Creator Foxit Software

Chapter Two: DIFFERENCES BETWEEN VERTICAL AND HORIZONTAL ANTICOMPETITIVE AGREEMENTS

competing in the same market.